Page 19 - Partnership Audit Rules - Drafting Partnership Agreements: The New Partnership Representative And The Outgoing Tax Matters Partner

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partnership will have 30 days to designate a successor partnership representative before the IRS will designate a new partnership repre- sentative. If the IRS has already re- ceived multiple revocations from different partners and determined it is unable to ascertain which partner- ship representative the partnership wants to designate, Prop. Reg. 301.6223-1(f)(4) provides that the IRS will notify the partnership that the designation is not in effect and designate a new partnership repre- sentative pursuant to Prop. Reg. 301.6223-1(f)(5) without providing the partnership with an opportunity to designate a partnership represen- tative. Under Prop. Reg. 301.6223-1(f)(5), the IRS is re- quired to notify the partnership of its designation by providing the partnership with the name, address, and telephone number of the new partnership representative. The des- ignation by the IRS of a new part- nership representative is effective on the day the IRS mails the notifica- tion to the partnership of the desig- nation. Prop. Reg. 301.6223-1(f)(5) also requires the IRS to mail a copy of the notification to the new part- nership representative. Prop. Reg. 301.6223-1(f)(5)(ii) provides that the IRS may designate any person as the partnership representative. In designating a person as the partner- ship representative, the IRS will consider whether the person is a partner in the partnership, either in the reviewed year or at the time the designation is made. In addition, the IRS may consider the other remain- ing factors listed in Prop. Reg. 301.6223-1(f)(5)(ii). After the IRS has made a designation of the new partnership representative, the part- nership may not revoke that desig- nation without the consent of the IRS.54
54 See Prop. Reg. 301.6223-1(f)(3)(iii) and ex- amples in Prop. Reg. 301.6223-1(f)(6).
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Powers of the partnership repre- sentative. The proposed regulations cast no doubt on the powers of the partnership representative. Indeed, Prop. Reg. 301.6223-2(c)(1) states, with a very big case of administra- tive hubris, that the broad authority of the partnership representative may not be limited by “state law, partnership agreement, or any other document or agreement.” Does the Service and Treasury really mean this? What if the partnership repre- sentative acts in direct contravention of the partnership agreement in an instance where a settlement of an audit, for example, requires a major- ity of the partners approval? As- sume further the IRS knows of such limitation. When the partnership representative signs off, the IRS an- swer must be “who cares.” Again, the new consolidated audit rules warn every partner in a partnership subject to the new regime that any action taken by the partnership rep- resentative with respect to the cen- tralized partnership audit regime under the Code and federal tax reg- ulations is valid and binding on the partnership for purposes of tax law, regardless of any other provision of “state law, partnership agreement, or any other document or agreement.” It is obvious that Treasury and the Service wanted the “chairs on the deck of the centralized audit rules ship” to be stacked this way. After all, why allow notice partners to participate at audit, appeal, or at trial? Why allow partners to file suit on behalf of the partnership if the TMP did not timely act. Why not just make it a two party affair re- gardless of how many partners are in the partnership or upper tiers of a tiered partnership.
Obviously, the partners in the partnership are going to want, if not insist, on contractual protection. The
55 The Blue Book, supra note 33, states that the partners may not participate in or contest
partnership representative might be able to literally force the reviewed- year partners to pay more tax, a lot more tax, without a right to contest or even appear. It is all done in a non-transparent manner unless, and only unless, the partnership agree- ment mandates transparency, limits the partnership representative’ s powers, and requires a degree of collective action before the repre- sentative can bind everybody.
Specific Powers of the partner- ship representative.
The partnership representative has the power to: (1) meet with IRS representatives in any audit or in- vestigation involving the federal in- come tax liability of the partners based on the audit of the partner- ship;55 (2) settle the audit with the IRS; (3) extend the partnership’ s statute of limitations (and therefore the partners’ statute of limitations with respect to partnership items); (4) bind all partners to a settlement agreement with the IRS, Chief Counsel, or the Department of Jus- tice, Civil Tax Division; (5) decline to challenge or contest all or part of a final partnership adjustment in court; (6) elect out of partnership treatment if it meets the require- ments of an eligible partnership and timely files the election required under Section 6221; (7) make any and all other decisions related to the payment methods set forth under Sections 6225 (partnership assess- ment) or Section 6226(b) (push-out election); (8) enter into a closing agreement with the IRS on one or more partnership items; and (9) de- cide to litigate one or more pro- posed adjustments to tax with re- spect to an imputed underpayment for a reviewed year and select the forum for such litigation. Despite comments the IRS received to the
the results of an examination of the partner- ship by the IRS.
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